How do they find value stocks – good reading on news
When markets sell off, a company with cash is the one-eyed man in the land of the blind. That’s why Justin Tugman and Tom Reynolds, co-managers of the $1.7 billion Perkins Small Cap Value fund, like companies with little debt and love companies with more cash than debt.
“We avoid companies that are highly levered because they tend to rely on capital markets at exactly the wrong time,” says Tugman. Energy companies or any cyclical businesses laden with debt are often forced to issue equity after their stock prices take a dive, he explains.
Tugman, 43, and co-manager Reynolds, 39, practice a risk-conscious approach, one that helps them steer the Chicago-based small-company fund (ticker: JDSNX) through choppy markets unscathed. What sets them apart from other fund managers in the space? They start with “realistic, but negative, downside analysis,” says Reynolds. “We tend to think creatively about what could go wrong.” Limited downside risk, as they see it, is a must.
They prefer quality businesses with strong balance sheets that generate double-digit returns on invested capital — but they won’t overpay for them. They sift through quality companies with stock prices that are at 52-week lows, or lagging their peers in price, for what they think are transient reasons.
Companies that make it into the fund — which Morningstar awards five stars — include uniform-rental company UniFirst (UNF), oil refiner Delek US Holdings (DK), heating-solutions engineer Thermon Group Holdings (THR), de-icing-salt provider Compass Materials International (CMP), and regional bank Columbia Banking System (COLB).
Barrons.com asked the managers to make their case for their five stock picks.
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